CPUC Rejects Multi-Year Capacity Market

By Published On: June 4, 2010

After five years of hearings and hundreds of millions of dollars of public and private expenditures, state regulators rejected launching an energy capacity trading market. Instead, the California Public Utilities Commission voted unanimously June 3 to continue providing resource adequacy--a mandated power cushion--via short-term contracts of up to one year between utilities and energy producers. “It is the largest non-event to hit the electricity sector since the Y2K,” said Jan Smutny-Jones, Independent Energy Producers executive director. (Y2K refers to fears that computers would crash worldwide when the year 2000 arrived.) For the grid, resource adequacy is a mandated 15-17 percent supply cushion to fill any power gaps during times of high demand or when power plants go off line. Debate continues over how to meet that power reserve--with the stated goal spurring competition, as well as new investments in a mix of generation resources at the lowest cost. Independent generators complain that the current single-year resource adequacy contracts do not allow developers to recover sunk costs. Consumer advocates and others worry that multi-year capacity deals would drive up rates and hand over some of the CPUC’s power to generators. “The decision rejects the creation of a central capacity market that would unwisely relinquish commission jurisdiction over electrical service in California” to the grid operator, said commission Dian Grueneich. “We take advantage of the lessons learned from [the 2000-01] energy crisis.” According to CPUC president Mike Peevey, the state’s energy efficiency, demand side requirements, and renewable energy mandate do not lend themselves to creating a state capacity market at this time. However, he said the option is not foreclosed. Commissioner Nancy Ryan insisted that state regulators first study the East Coast capacity markets before moving into this territory. This is one area she said “California should not be a trail blazer.” She and Peevey also lamented the huge investments in staff and resources spent since 2005 on this second phase of the Resource Adequacy docket. “It is a tribute to our speed,” quipped Peevey. He added it should not reflect negatively on the commission or staff because of the complexity and “murky waters” at issue. The California Independent System Operator developed some temporary capacity market products and the decision’s impact on those is unclear. “We are still reviewing the final decision,” said grid operator spokesperson Gregg Fishman. In a brief to the CPUC before the decision, the grid operator--which would have run a multi-year capacity market-- stated that the capacity trading platform “will allow transparent, economic competition between existing resources and new market based investment to provide specified quantities of resource adequacy capacity at the system level and for each local capacity area.” It had no additional comments before press time.

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